Potential for Canada's Hawkish Cut bodes well for "Loonie"
The Canadian Dollar has been subject to losses thus far this year primarily because of the unmaterialized pessimism regarding the American economy and the fading hopes that the U.S. Federal Reserve would be entering a period of looser monetary policy. Speculators simply had it wrong. Fed chairman Jerome Powell and officials have made it clear that there is a lack of evidence for a pivot towards a "dovish" policy to begin taking place. Interest-rate cuts seem distant for the U.S., while in Canada, items have lined up for central bankers to start slashing borrowing costs.?
In 2024, the "Loonie" has fallen by 2.7% in value. The trend has changed slightly recently, with CAD looking more appealing. On April 16th, the currency declined to its weakest point against its American counterpart since November 2023. However, there has been a recovery of 1.0% since reaching that nadir. A lot is due to a steady economic situation with a seemingly manageable slowdown. Growth remains, although not as strong as at the end of last year, with Q1 Gross Domestic Product coming in at 1.7% versus 2.2% estimated. In the most recent monthly average, March came in flat. All considered, the economic situation is one that can be envied in other regions of the globe.?
The labor sector remains a solid backbone of the economy, aided in recent years by an influx of immigration that has added to wages and productivity. Disinflation has taken place and made it more comfortable for the BOC to reduce borrowing costs without worrying about adding to price pressures. Nevertheless, things are slowing down enough that it is appropriate for the BOC to consider expansionary policy. While consumers sense some easing, Industrial Prices have continued to increase for producers. Retail Sales are in contractionary territory, with March at (-0.2%), and Purchasing Manager's Indices have stayed below expansionary reading above 50.0 since the end of April 2023.?
Our view is that the Bank of Canada has the room to cut from its 5.0% benchmark interest rates and will do so tomorrow without hesitation. Although there are some opinions out there that the BOC should not get ahead of the Fed, it seems the recipe is there between lagging economic indicators and falling prices to make the BOC feel its measures can be helpful. A determining factor in how CAD reacts will be how Tiff speaks about future reductions and if he makes it clear that the BOC sees the economy on a healthy path.
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